By Jacob Passy
Mortgage rates increased significantly again this week — making a refinance less attractive to many homeowners across the country in the process.
The 30-year fixed-rate mortgage averaged 2.97% for the week ending Feb. 25, up 16 basis points from the week prior, Freddie Mac /zigman2/quotes/202741363/delayed FMCC -3.35% reported Thursday . This is the highest the benchmark mortgage rate has been since August.
The 15-year fixed-rate mortgage rose 13 basis points to an average of 2.34%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage jumped 22 basis points to 2.99%.
“After months of holding firm, even as Treasury yields steadily climbed, mortgage rates have finally relented in the past couple weeks, keeping pace with yields that have turned their steady jog upward into an all-out sprint,” said Matthew Speakman, an economist with Zillow /zigman2/quotes/204413973/composite Z -1.09% /zigman2/quotes/205077794/composite ZG -1.11% .
Typically, mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury note. But over the course of the pandemic, that relationship has faltered at times, with mortgage rates not dropping near 0% like Treasury yields did. This week, the 10-year Treasury yield hit 1.40% for the first time in a year.
A combination of factors is driving Treasury yields higher. Investors are bullish on the rollout of the COVID-19 vaccine and the effect it’s having on case counts, Speakman said. At the same time, that optimism is somewhat tempered by concerns related to the possibility of higher inflation, which could cause the Federal Reserve to correct course.
The rise in rates is already having a major effect on people’s interest in refinancing. For roughly the past year, the country has been in a refinancing boom — as rates dropped lower and lower, refinancing into a new mortgage became increasingly attractive to a wider swath of homeowners across the country. Plus, with many homeowners looking to renovate their homes in light of the pandemic, many took advantage of the ultra-low rate environment to pursue a cash-out refinance and put that money toward those home improvement projects.
But those days may be over. The latest mortgage application data released from the Mortgage Bankers Association showed that the volume of applications has decreased, led by a decline in refinances. While still 50% higher than a year ago, refinance activity has dropped to the lowest level since December, Joel Kan, the associate vice president of economic and industry forecasting at the Mortgage Bankers Association, said in the report.
It’s not just homeowners who are being dismayed by rising rates. Applications for mortgages used to purchase homes declined, albeit by a smaller amount.
“Recent rises in mortgage rates appear to be dampening homebuyer enthusiasm,” Realtor.com chief economist Danielle Hale said, citing the application data. “Rising rates and rising home prices amid a short supply of homes will undoubtedly challenge many homebuyers.”
Rents are also rising in many parts of the country, including some of the most affordable markets for homeownership, Hale said — so that should continue to help spur demand among home buyers, even if rates continue to edge upward.